4. Summary of A.06-12-025

In A.06-12-025, Cal Water requests authority under Pub. Util. Code § 454 to recover its PBOP regulatory asset of $9.87 million over a 15-year period.⁸ Cal Water proposes to recover the regulatory asset via a flat monthly surcharge of $0.12 per customer, although Cal Water does not oppose a consumption-based surcharge. Cal Water intends to roll the surcharge into general rates eventually.

Cal Water admits that it did not follow the formula in D.92-12-015 for calculating its PBOP regulatory asset. That decision set the regulatory asset equal to the cumulative difference between a utility's FAS 106 costs and the amount of FAS 106 costs recovered in rates. However, Cal Water was unable to track the amount of FAS 106 costs recovered in rates because it has different tariffs for each of its districts. Under the Commission's past rate-case plans, Cal Water was prohibited from changing rates in all districts at the same time. Thus, when tax-deductible contributions were updated in a GRC filing, only those districts that were subject to the GRC filing (usually 8 of the 24 districts) would have rates adjusted for the new contributions. The following year 16 districts had the new contributions in rates, and by the third year all 24 districts. The result was that rates always lagged behind contributions.

Another reason Cal Water could not track its FAS 106 costs recovered in rates was that Cal Water and DRA settled most rate cases. FAS 106 costs were typically not identified in the settlements. Rather, these costs were usually embedded in a larger category of expense such as employee benefits, which itself was a compromise amount.

Cal Water explains that because it could not track the amount of tax-deductible contributions recovered in rates, it recorded a regulatory asset equal to its FAS 106 costs less its tax-deductible contributions. This produced a smaller regulatory asset than would have occurred had Cal Water followed OP 4. Cal Water maintains that ratepayers have benefited from the method it used, since it has produced a smaller regulatory asset for recovery in future rates.

Cal Water acknowledges that its decision to use a single 401(h) account prevented full funding of its annual FAS 106 costs due to statutory limitations on tax-deductible contributions to 401(h) accounts. To overcome these limitations, Cal Water has established two VEBA trusts. The two VEBA trusts, together with the existing 401(h) account, will enable Cal Water to henceforth make tax-deductible contributions that are sufficient to cover both its annual FAS 106 expense accrual and its PBOP regulatory asset.

Cal Water's decision to file A.06-12-025 was driven by its external financial auditors. The auditors informed Cal Water that it would have to either (1) demonstrate that the PBOP regulatory asset that Cal Water has accumulated since 1993 is recoverable in future rates, or (2) write-off the regulatory asset. Cal Water chose to file A.06-12-025 in order prove to the auditors that the regulatory asset is recoverable in future rates.

⁸ All statutory references denoted by the symbol "§" pertain to the California Public Utilities Code unless otherwise indicated.